Marketplace lenders: Challengers target MPL connections
In May 2015, UK upstart Metro Bank forged an alliance with marketplace lender Zopa, the first such tie up in this market and a potential blueprint for other UK challenger banks to take on the high-street incumbents.
Under the deal, Metro, launched in 2010, can deploy deposits through Zopa, one of the earliest peer-to-peer platforms (it was founded in 2005).
“Metro and Zopa have very aligned interests,” Jonathan Kernkraut, retail and business propositions director at Metro Bank, tells Euromoney. “We get a good home for our customer deposits and they get funding. Together we can challenge the big banks. This sort of consumer lending is a consistent source of profit for the large banks, and marketplace lenders will eat into this.”
For a small bank like Metro, the tie up with Zopa makes obvious sense. Metro has more deposits than it can lend traditionally and Zopa can lend out more than it can raise from traditional peer-to-peer investors.
“We want to grow a business with a really strong retail base. The challenge is to be able to match the supply of funds with borrowers: our borrowing is currently growing faster than our investor base,” explains Mat Gazely, head of communications, PR and social media at Zopa. He claims that the quality of underwriting in this segment is often better than that in some sections of the US market. “You can’t club all P2P platforms together. You can see which platforms are the most trusted by looking at the institutional partners that they work with. The quality of the loan book in some US securitizations is likely to be different to the loan book of, say, a leading UK platform.”
One such leading UK platform, Funding Circle, was in the process of bringing Europe’s first marketplace loan ABS as Euromoney went to press. Deutsche Bank has been mandated to arrange a £130 million sterling-denominated RegS deal. Given the recent volatile performance of several US MPL ABS deals, the issuer is understandably keen to outline the credentials of this new ABS asset class.
Sachin Patel, global co-head of capital markets at Funding Circle, emphasizes the extent to which the industry has changed. “In the mortgage crisis, underwriting was outsourced and no one validated the application data,” he says. “We undertake a lot of due diligence, and the banks check what we are doing. All loan performance is published online on our website; with the originate-to-distribute model no one knew what was in the loans. We publish details of every loan on our website – there is real reporting. You can very quickly see what is going on. Our skin in the game is that we are totally transparent.”
Patel believes that small-business loans originated online are particularly suited to securitization pools. “These are very vanilla, small-balance SME loans, and repayment levels are very stable. They are far more vanilla than a portfolio of bank loans,” he says, pointing to the superior quality of SME loan books compared with the consumer equivalent. “It is important to differentiate between small-business and consumer lending. I can get a consumer loan right now at 3.49% from M&S and 3.5% from NatWest. But the point of entry for a business is much harder.”
If this deal, SBOLT 2016-1, is well received, then other UK online lenders could follow suit. “Securitization is on the radar of one of our institutional partners and it is a conversation that is being had within the industry,” says Gazely.
Zopa has a number of partnerships with investors, including sector specialist P2P Global Investments. “The loans booked in the last five years are significantly lower risk,” says Gazely. “They are reliable and predictable, which is attractive for securitization. This is a mechanism to reduce the cost of leverage to institutional investors.”
Gazely emphasizes, however, that retail investors will retain priority at Zopa. “We always lend out our retail funds in a timely fashion. If we are longer on retail funds then we have to turn institutional funds down a bit. We are not looking to disadvantage the retail investor; our institutional partners understand that we have an obligation to lend our retail money first. We have had approaches from institutions that want priority and we say: ‘No thanks’. We don’t allow cherry picking of loans.”
For banks, online lending is the key to future market share.
“The decision to partner with Zopa was more driven by the cost to us of building our own infrastructure to lend online nationally,” says Kernkraut, although Metro won’t be shuttering any of its 37 branches any time soon. “Different people want different things. We are attracting customers who want personal service in store, which you don’t get from online lenders. Others want a two-minute online process. There is room for both.”
Patel at Funding Circle agrees that good underwriting cannot always be achieved with an algorithm alone. “Marketplace loans look at the underlying asset,” he says. “I have concerns around the idea that underwriting can be completely electronified – you always need human involvement.”